Flextronics, Siemens lead ‘big shift’ to cloud computing

Flextronics Chief Information Officer David Smoley knew he was taking risks as he handed over human resources computing tasks for his 200,000-employee company to an outside provider.

What would happen, for example, if the other company lost sensitive employee data, he wondered. Yet by enlisting Workday, rather than using in-house software and hardware, Smoley was able to cut costs by millions of dollars, and he says workers' information has remained secure.

Executives in growing numbers are entrusting computing responsibilities to companies that deliver software and services over the Internet, from outside their walls. Rather than depending on expensive in-house data centers that house row after row of energy-sapping servers, Flextronics has turned to the so-called cloud. "To take full advantage of the cloud, I think you have to be willing to take some risk," Smoley says.

While companies have been experimenting with the cloud in fits and starts for years, they're now turning over large-scale operations to third-party vendors. Pleasanton (California)-based Workday is now handling the human resources software that tracks everything from employee compensation and benefits to hiring for open positions at Flextronics, the Singapore-based maker of such electronics as Research In Motion's BlackBerry handsets and Microsoft's new motion-sensing Kinect add-on for the Xbox 360 gaming console.

Siemens turned to SuccessFactors for performance reviews and other tasks for its more than 400,000 employees, says Ben Pring, a senior research analyst at research firm Gartner (IT). About 50,000 employees at Winn-Dixie Stores use Concur Technologies for travel and expense reporting. Telecommunications gear maker Huawei and computer vendor Lenovo are also Workday customers.

Growth Market

The worldwide market for cloud services is likely to grow to $148.8 billion in 2014 from $58.6 billion in 2009, according to Gartner. "It's a big moment of change," Pring says. "The last time companies saw this big a shift in computing was when PCs entered the workplace over 20 years ago." In the next five years, companies will spend $112 billion cumulatively on software delivered as a service over the Internet and comparable services, Gartner says.

Demand for cloud services has been fueled as the recession forced companies to look for extra ways to reduce expenses. Workday's sales grew 100% in 2010, 50 percent in 2009, and 100 percent in 2008, says Aneel Bhusri, co-chief executive officer of Workday, which as a closely held company doesn't disclose revenue.

Flextronics' adoption of the cloud is part of a series of computing shifts that resulted in $100 million in savings in three years, the company says. Expense reductions are essential at Flextronics, which has an operating margin of only 2.9%.

Fewer staff and other resources are needed when a company moves to an outside provider than when it purchases and manages software in-house, from vendors such as SAP, the world's largest maker of business appli-cations, Smoley says.

"You're not buying $3 million worth of servers and signing a deal with a third-party integrator for $10 million," Smoley says. He's needed less than 20 people to implement Workday. "For an SAP implementation you would be talking 60 people, maybe up to 100 people."

Cloud services, like the one Workday provides, let companies rent hardware and software. The vendor handles the heavy lifting of upgrades in its own data center, while clients pay a monthly fee per worker. Salesforce.com (CRM) pioneered the concept of software as a service a decade ago.

Today the choices are broader and include renting messaging and collaboration apps from Google or computing and storage capabilities from Amazon.com or Microsoft's Azure, released in November.

Largest Providers

By November 2009, about 100,000 companies used software as a service or cloud applications, according to Bruce Richardson, former chief research officer at AMR Research.

With 67,900 paying customers, Salesforce.com was the largest provider, followed by Concur with 9,000 customers, and NetSuite, Taleo and SuccessFactors, according to a November 20, 2009, blog post by Richardson, who has since become chief strategy officer at Infor, a provider of cloud services.

Accenture CIO Frank Modruson says he's drawn by the possible cost savings and that he plans to move the company's internal e-mail system to a cloud service over time. "I'm running a couple hundred thousand mailboxes," says Modruson.

"If I can get it for cheaper, I should." Accenture also uses Taleo's software as a service for recruiting employees. Some other large software makers, including Oracle and SAP, are playing catch-up. "SAP should be running screaming, the company is significantly behind," says Daryl Plummer, group vice-president at Gartner Research.